It has been observed that several AIFs face difficulties in surrendering registration because liquidation proceeds remain undistributed beyond the permissible fund life due to pending or anticipated litigation, tax demands, or residual operational expenses. The paper proposes allowing retention of funds beyond the liquidation period under specified conditions, including demonstrable litigation or tax notices, investor consent in cases of anticipated liabilities, and substantiation of operational expenses. A new framework is proposed to classify such funds as “inoperative AIFs,” with proportionate regulatory compliances, prohibition on new schemes and management fees, and annual reporting obligations. The comments/ feedback from stakeholders is invited.